恩智浦 (NXPI) 2010 Q3 法說會逐字稿

Welcome to the NXP Semiconductors Third Quarter 2010 Results Earning Conference Call on Tuesday, the 2nd of November 2010. During the introduction by Mr. Richard Clemmer, CEO, and Karl-Henrik Sundstrom, CFO of NXP, all participants will be in a listen-only mode. After the introduction, there will be an opportunity to ask questions.

(Operator Instructions)

Please note that this call will be recorded. I will now hand the conference over to Mr. Richard Clemmer. Please go ahead, sir.

Thanks. And welcome to NXP's third quarter 2010 results conference call. For those of you who have not received a copy, our earnings press release, third quarter report, and an investor presentation are all available on our website, nxp.com.

Before we begin, I'd like to call your attention to the safe harbor statement regarding forward-looking statements on page two of the presentation. Also, please note we will present both GAAP and non-GAAP financial information in this call. For reconciliation of our non-GAAP information to the most comparable information under generally accepted accounting principles, please refer to today's earnings press release.

I'll start by giving you a brief business overview and then turn the call over to Kalle who will provide you with more detail on the financial performance. Following that, there'll be an opportunity for questions and answers.

Let me first start by reviewing our third quarter performance. The third quarter represented our sixth consecutive quarter of growth and significant operational improvement. Our results were in line with the revenue guidance provided in our Q2 release. And we exceeded the high end of our profit guidance.

The operating leverage in our model is clear. And once again this quarter, you saw the evidence of it as we expanded profit margins and made good progress in execution of our High Performance Mixed Signal strategy that is the foundation of our future growth plan.

Revenue was $1.213 billion, a 13% increase from a year ago on a nominal basis and a 25% increase on a comparable basis. Generally accepted accounting principle operating income was $130 million or 10.7%. And non-GAAP operating income was $211 million or 17.4% of revenue. That's a very good improvement since last year, when we reported non-GAAP operating income of 4.5% of revenue. But we realized that we have a lot more work to do in order to reach our non-GAAP operating margin target range of 21% to 26% of revenue. And as our performance improves each quarter, it further validates our strategy.

The High Performance Mixed Signal business has growth 31% over the last year or 36% on a comparable basis and has clearly gained market share from last year with September year-to-date revenue up 55% on a nominal basis and 57% on a comparable basis. High Performance Mixed Signal now represents 70% of our total product revenue. Product revenue is defined as the sum of High Performance Mixed Signal and Standard Products segments. As we continue to grow and focus on higher margin opportunities that take advantage of our technology and applications expertise, we're targeting this High Performance Mixed Signal business to operate at non-GAAP operating margins in the 24% to 29% range. This quarter we got very close as it achieved a level of 23.1% non-GAAP operating margin and 56.5% non-GAAP gross margin.

Our continued success in winning new designs has helped us achieve this growth and continues to position us well for future growth. The areas that have been particularly strong over this period are identification, automotive entertainment, automotive networking, microcontrollers, base stations, and lighting drivers.

In the third quarter, revenue from our HPMS segment was relatively flat sequentially as capacity constraints limited our growth potential in a few areas, like identification and microcontrollers during Q3, while at the same time in some specific consumer and notebook PC markets, orders were mixed with demand in some areas not as strong as the prior quarter.

Overall wafer fab utilization was pushed to 99%, up from the 96% in Q2, with that increase coming primarily from our workhorse facilities, the 8-inch fab in Singapore as well as the 8-inch facility in Nijmegen.

We've also been addressing capacity constraints in High Performance Mixed Signal. And actions that we took earlier this year will begin to impact later this year and throughout next year with the largest increment coming around next spring. The largest investments are in SSMC, which is our joint venture fab with TSMC in Singapore.

Another significant factor that allows us to increase wafer fab capacity in support of our High Performance Mixed Signal business next year is reduced wafer shipments to third parties. This business, which is operated at breakeven, relates to transition agreements which will be reduced very significantly by the end of 2011. This activity is reported in our Manufacturing Operations segment.

There were also a number of highlights in our High Performance Mixed Signal business last quarter. Let me just list a few of those.

We continue to win business in eGovernment secure MCU solutions. In August, we were awarded a contract to supply the German government with our smart MX security chip for the country's new electronic national ID cards.

Also, NFC is another highlight area for us. In the third quarter, we shipped our 1 millionth NFC chipset, which is integrated in the smart phones of leading global cell phone manufacturers. We also had the first fully functional silicon for our entree product into mobile chargers sampled with our new GreenChip. We had first silicon on RF small signal base station products and two new design wins for LTE base stations.

Also, we continue to make good progress on CFL driver ICs in ramping customer shipments in Q4, primarily for the US market. In automotive, we had a ClassD High Efficiency Audio Amplifier design win at Hyundai and a strategic alliance signed with a leading European-US car audio manufacturer.

During the quarter, we also completed an important acquisition. We acquired Jennic, a leading developer of low-power RF solutions for wireless applications. Their state-of-the-art portfolio of complementary 802.15.4 and Zigbee technologies give us a comprehensive wireless semiconductor platform to support emerging technologies, including eMetering, smart lighting, building automation, asset tracking, and device remote controls.

Now let me turn to the Standard Products segment, which achieved $314 million in revenue this quarter.

Actions to remove capacity bottlenecks that we took earlier this year helped us achieve 9% sequential growth in the current quarter. The business achieved 22.3% non-GAAP operating margin this quarter, a particularly high level, as it benefited from a number of favorable factors, including very high capacity utilization, very strong market pricing, and the impact of the Redesign Program.

In addition to the good operating performance in both segments in third quarter, we took a number of steps to improve our capital structure. In August, we completed an initial public offering with $450 million in net proceeds. And earlier in the quarter, we completed a $1 billion bond offering, which allowed us to extend debt maturities to 2018 for that $1 billion. In the quarter, we generated $158 million in cash from operations. And during 2010, we have reduced our net debt by over $550 million.

And now I'd like to turn the call over to Kalle to take you through some of the operational highlights and the financial details of the quarter.

Thanks, Rick.

Let me first mention that we made a number of changes to the format of our earnings release this quarter. It is longer and more detailed than in the past, based on inputs from the financial community. In addition, we have posted a slide presentation on our Investor Relations website. As in the past, we encourage your feedback as we try to continually improve our communication with analysts and investors.

In my presentation today, rather than spend a lot of time on information already in the release, I'm going to cover the high points and save more time for Q&A.

But first, let me make a couple of specific comments on items in the release.

You'll note in the release and in Rick's comments, we discuss revenue growth, both in nominal and comparable terms. The comparable calculation adjusts for both currency impact and material acquisition and divestitures. This quarter, the difference in the sequential number is small. But the impact in the year-over-year comparison is significant. Nominal growth is 12.6%, while comparable growth is 25.2%.

The unfavorable currency effect in Q3 2010 was $38 million in total with $27 million of that coming from HPMS. The other factor was the divestiture of our Home business to Trident. In Q3 2009, our Home revenues were $136 million. And in Q3 2010, we still have some revenue related to that business due to our manufacturing support, but it is at a much lower level. It is recorded in our Manufacturing Operations segment. And it represented about half of that revenue in Q3 2010.

Turning to OpEx, on US GAAP basis, total OpEx was essentially flat quarter to quarter at $379 million. On a non-GAAP basis, it increased $6 million with all of it in R&D, which was $155 million on a non-GAAP basis in Q3 compared to $140 million in the prior quarter. Essentially, all of that increase was in our focus area of High Performance Mixed Signal, where R&D totaled $121 million or 17% of revenue.

Selling expense was flat at $65 million in the quarter, and G&A declined $9 million on a non-GAAP basis.

As Rick indicated, both of our product segments performed well during the quarter. Compared to last year, we have outgrown our market, and we are making good progress toward our profit targets. We also significantly improved our balance sheet.

The key driver of our operating leverage is the Redesign Program. Since the launch in September 2008, we estimate that $740 million (Company corrected after the conference call) in annualized cost savings has been taken out of the business, including an annualized $55 million in the last quarter.

Savings have been realized primarily through factory closures and other actions to reduce our manufacturing footprint, particularly in high-cost countries as well as refocusing and resizing our central research and development and streamlining our support functions. At the present time, we are in the final stages of closing our ICN5 fab in Nijmegen, as we have consolidated production into more cost-effective factories.

One update to give you, we had earlier planed to close our Nijmegen fab ICN6 in 2011. Given market demand and the timeframe required to find a more cost-effective alternative, that plan has now been moved out in time. But the targeted redesign cost savings will remain the same.

We now estimate the total cash-out for the Redesign Program to be no greater than $725 million by the end of 2011. Since the beginning of the program in September 2008 and until the end of the third quarter of 2010, $614 million of restructuring costs related to redesign have been paid, of which $60 million relates to the third quarter of 2010.

We have also increased CapEx to expand our manufacturing capacity, primarily in the high-growth High Performance Mixed Signal segment. Year to date, net CapEx is $166 million compared to $42 million at the same time last year.

As Rick mentioned, this quarter, we completed a number of deleveraging actions. The proceeds from the IPO plus cash generated by operations allowed us to buyback $461 million of outstanding debt and repay $100 million on our revolving credit facility during the quarter. We also completed a bond offering, which allowed us to extend maturities of $1 billion our debt to 2018.

In the quarter, we generated $158 million of operating cash flow net of $60 million in payments related to the Redesign Program. And since the beginning of the year, we have reduced our net debt by over $550 million. Cash balance at the end of the quarter was $962 million.

Net debt at the end of September was $3.687 billion. And adjusted EBITDA for the last 12 months was $972 million, giving us a net debt-to-adjusted EBITDA ratio of 3.8. And more recently, in October, Standard & Poor's upgraded NXP's corporate credit rating to B-minus. Going forward, the Company continues to seek opportunity to repay or purchase outstanding debt.

Before I turn back to Rick for comments on the fourth quarter's business outlook, let me provide you with a couple of items to help you in your modeling of Q4.

We expect net interest expenses to be in the range of $75 million to $80 million in Q4.

On cash taxes, as you recall, for modeling purpose, we guided to an annual number in the $30 million to $35 million per year range. That is still our expectation for this year, but the numbers are somewhat lumpy. Year to date, we have paid $12 million. And with settlements expected this quarter, we anticipate the Q4 number to be in the range of $16 million to $20 million. So that means that we will have averaged about $8 million per quarter for the year, but for those of you modeling cash taxes, you will see a rather significant jump from Q3 to Q4 at $16 million to $20 million.

I also need to give you some guidance and comments on minority interest, which relates primarily to SSMC and Nutune. That line had been running about $10 million to $12 million per quarter. But mainly due to the poor performance in our Nutune joint venture, in the 3Q, it was only $7 million. In Q4, we expect minority interest to be back up in the $13 million range. In your modeling, you'll see that this anomaly will also hurt us in the sequential Q3-to-Q4 comparison because Q3 was somewhat low.

For share count in Q4, please use approximately 250 million. I'd now like to turn the call back to Rick for comments on the fourth quarter outlook.

Thanks, Kalle. As we discussed last quarter, some of our lead times began pulling in. And that process continued during third quarter, I think not just for us but for most of the semiconductor industry in areas where supply had been tight earlier in the year. As lead times continue to move toward more normal levels and customers actually gained more confidence in their ability to obtain product, as you would expect, we began to see adjustments in order patterns. While demand in our large ID and automotive businesses remained strong, we're seeing some mixed signals in certain consumer PC and industrial markets.

We believe the signs we're seeing point to a semiconductor market that is transitioning to more of a normal seasonal growth pattern.

We expect product revenue in the fourth quarter to be relatively flat sequentially on a comparable basis. Non-GAAP operating income is expected to be up 3% to 7% sequentially, as our margins continue to benefit from the results of our Redesign Program.

Let's now move to the Q&A portion of the call. Albert?

Thanks, Rick. This is Albert Hollema. I will facilitate this Q&A session. In order to provide more people an opportunity to ask your questions, please limit yourself to one question. After our response, we will provide you an opportunity for an additional follow up. Now I would like to turn it over to the operator.

Thank you, Albert.

(Operator Instructions)

Your first question comes from Mr. John Pitzer from Credit Suisse. Please state your question, sir.

Yes, good morning. Congratulations on the good results. Rick, I was wondering if you could help us put the bookings number in Q3 in perspective. What were Q2 bookings? And I guess with book to bill so far below one in Q3, why the confidence in the flat revenue growth for the December quarter? Thanks.

Yes, thanks, John. Thanks for your comment. So the interesting thing about our business dynamic that actually took place in Q3 is, while our book to bill was clearly down, our book to bill for our non-disty customers was still at 1.04. So that continues to give us good insight and confidence relative to the non-disty customers. And then when we look at our disty inventories, which while they increased slightly are very much in line with where we would like for those levels to be, we continued to see good sell-through in distribution.

So the combination of the good sell-through in distribution, the good market environment, as well as the book to bill and the backlog that we have in place for our OEM and non-distribution customers is really what gives us the confidence in the ability to achieve relatively flat sequential revenue, which I think is a little bit better than many of our peer competitors have projected.

And then, guys, maybe as my follow up, Rick, what's typically turns in a given quarter? And with the flat revenue guidance for the December quarter, what's the expectation for turns in the current quarter?

Sorry, our internal inventory, John?

No, for just the amount of businesses that you have to book and ship within the December quarter versus kind of normal turned levels.

Yes, okay. Thanks. So I think in this -- at this point in time, it's probably about 15% or so of revenue that still has to come in on a turns basis. In the last couple of quarters because of capacity constraints, the number may have been slightly below that. But it's basically in that line, so not anything that's really significantly or earth shattering in a change of the overall business, John.

Thank you.

Thank you.

Your next question comes from Mr. James Covello from Goldman Sachs. Please state your question, sir.

Great. Thanks so much for taking the question. Congratulations on the very good results. Maybe if we start out, what would you define as normal seasonality for your businesses as you head into the first quarter and each of the segments? Thank you.

Yes, Jim, coming off of 2010, normal seasonality has kind of been out the window, as you well know from the first -- from the early parts of 2010. I think on a normal seasonal pattern basis, you would see flat to slightly down in Q4 in most of our businesses. It's not clearly the same across the board but kind of on that basis because of the consumer and cell phone businesses that typically decline as well as any products sold into storage that typically decline in the Q4 timeframe.

Q1, because of the Chinese New Year, also then continues to be down slightly, then with kind of a strong rebound in Q2 and continued improvement into Q3. So on a normal seasonality basis, we would expect to see that. I mean, the key factor for us, Jim, is the strong design wins that we have and the ability really to allow us to support the perspective that we have and look forward to strong growth into 2011 as well.

And this is Kalle. As Rick said, we have had very unusual years. 2008 was a strange year. 2009 was a very strange year. And this year is a year of rebound. So it's a little bit unusual -- and at the same time, we have really seen change in the industry. But in broad terms, it is what Rick is saying.

But we're very fortunate that we have the design wins coming on and ramping up in some of the areas that we talked about where we still have capacity limitations to help us be able to really have that comfort associated with sequentially flat on our product revenue.

Okay. And then if I could follow up, as we look out into calendar year 2011, what do you think the top three growth drivers within HPMS are going to be for next year?

Well, our High Performance RF with the continued success on the design wins we have in base stations there continues to be an important part of our business. Our ID business, with the combination of the expansion of that business plus the ramp up of near-field communications, where we expect to see that broadly across the board in all smart phone manufacturers deployed at some point in time through 2011, Nokia has announced that all of their smart phones beginning in 2011 will be NFC enabled.

And in one of the areas, while it's at really early stages currently and we're just beginning to ship in Q4 is in the CFL IC lighting drivers that we think will ramp very significantly in 2011 based on the success associated with that. So we continue to expect to see strong progress in our GreenChip business. And then we have solid growth in the other areas of the business as well. But those are really the keys to be able to drive the growth going forward into 2011.

Okay. And if I could just slip in one more maybe, what should we expect the Manufacturing Operations and corporate revenue to be this time next year, just as we think about buttoning up our models?

As Rick said in the script, it will come down significantly. There are a couple of unknowns out there because we don't have the same insight into that in the end of life. But it's now running at a level of 137. And I believe it will come down significantly on that. I don't want to give a number to be hanged out on. But it's going to come down significantly from the number we're having right now.

And, Jim, part of that depends. So we in those relationships, as you know, it's a customer service viewpoint on some basis, even though we don't make any profit on it. But on the wafer shipments clearly associated with the ST Ericsson and DSP Group, those will fall of significantly.

In the case of the assembly test services that we provide to Trident, in fact that could be relatively maintained. So that could keep a relative basis. But we have to work out the details of that. We still are yet to work out the details of that that far out for Q4 of next year with Trident.

But clearly with our 60% economic ownership in Trident to the extent it gives them a competitive advantage and doesn't create a real burden on our operations, we'll continue to be able to support them with a cost advantage that we are able to provide them.

Thank you so much.

Thanks a lot, Jim.

Thank you, sir. Your next question comes from Mr. Tim Luke from Barclays Capital. Please state your question.

Thanks so much. For Kalle, you made some progress on your gross margins in the period you just reported. Could you give us some feel for how you perceive the variables for the gross margins as you move through the calendar fourth quarter and into calendar 2011? Thank you.

So one of the big levers is obvious, like that we talked about in the presentation before, is the Redesign. And I actually said an error here. I said a year-to-date saving was $650 million in the script. It's actually $750 million. It's actually $740 million. And that was what I was also supposed to say. So that means that adds up with the 55 that we had in Q3.

And that will come out more out of the manufacturing and in the gross margin, which is mainly the reason why we can guide over 3% to 7% margin improvement, operating income improvement on relatively flat sales. That is coming out on the gross margin.

And then going into the next year, we will have the full effect in the first quarter of ICN 5. We got some effect in Q3. We will get some in Q4. But then in -- we have a full, on a run rate basis, effect on Q1. And we get certain more costs out of our Hamburg operation. So I think this quarter was a well -- a good step directionally in the way where we talked about the margin improvements during the road show and in Q2.

And, Tim, if I could just add one thing as well, so the mix of our product shipments, with the strength that we have in ID and the growth that we have associated with that, that clearly helps us with our gross margin expansion as well, as it tends to be more profitable than some of our other business lines within High Performance Mixed Signal.

Just a follow up, Kalle, if you could possibly just remind us how you'd expected the operating expenses to trend into December and how you're broadly thinking about managing your OpEx just as a reminder in '11.

And then, lastly, if I may, just for Rick on a broader level, having observed this industry for some time, when you suggest that there were somewhat more mixed trends in consumer and PC and industrial, if that reverts to seasonal, what's the timeline that you think that that will see, as you put it, more mixed trends or sequential decline before seeing reacceleration? Do you think that that should be the June course that the industry kind of begins to reaccelerate again? So Kalle and then Rick, thanks.

So for Q4, in the guidance that Rick read out, as said, most of it will come out of gross margin. It indicates that we're having relatively flat OpEx. And then going into next year, I would say that we haven't really given guidance. But the margin expansion is basically coming out of gross margin. And I think that's it.

Thank you. Rick?

So, Tim, it's really hard to call the actually basis associated with it. I'll give you a couple of factors. And I think that we're kind of at that normal, more normal seasonal basis now with a slight decline in Q4 and I would anticipate for market a slight decline in Q1 and really seeing a rebound in Q2.

The areas where we've seen weakness are in the notebook PC area, our GreenChip, which has a significant market share in the notebook PC area, as either through a combination of a reset or maybe even some impact from iPad shipments, the notebook PC shipments were clearly impacted in the Q3 timeframe. And we would expect that to kind of go back to more of a normal basis. And then most of the PC manufacturers are talking about that rebounding out a couple quarters from now.

The other area in the consumer space that quite interestingly has been relatively weak -- and it happens every four years. And everybody kind of ignores it every four years until after it happens -- is the period of time after the World Cup. If you look at it historically, the quarters after the World Cup always see a decline in the TV business. And our TV front-end business has clearly been impacted -- the market, not our business -- but the market has clearly been impacted by that basis associated with that.

So a combination of both of those and then, frankly, we've seen a little bit of mixed signals even in our microcontroller area, where we've seen strength through the September timeframe and October. But we still feel very comfortable with our ability to have our product sales be sequentially relatively flat, even with that.

Thank you, guys. Good luck.

Thanks, Tim.

Your next question comes from Mr. Mark Lipacis from Morgan Stanley. Please state your question, sir.

Thanks for taking my question. On the capacity going forward, could you just help us understand how you expect that to come online, how the total capacity increases from shifting your internal capacity from programs that you have committed to for external? And I'm trying to understand how the increasing capacity might impact your cost structure. Thanks.

Yes, thanks. I think, Mark, it's important to point out that the real capacity limitation is on some specific areas now. It's not across the board. So we should be very clear that we're not capacity limited across the board. It's really in our 140 nonvolatile business, which supports our ID business, our microcontroller business. And with some of the most recent changes, we've been able to actually move capacity around associate with that.

We'll see some of that capacity coming online here in the -- a little bit of incremental capacity coming online in Q4 and then some of those investments that we actually approved back very early in 2010 actually kind of coming on more significantly in the spring of 2011 with some continued increases kind of throughout 2011, but the largest concentration of capacity kind of coming on in the spring of 2011.

From an overall cost viewpoint, it won't be a major significant factor relative to cost basis or cost burden. It's more about the incremental capacity that comes out of that and the ability to be able to support those that increase product sales that we have from the success that we've had in design wins over the last few quarters and the ability to ensure that we can ramp up our volume to meet those customer requirements on those design wins and really the significance associated with being able to meet those capacity requirements to support that ramp up in customer requirements.

Okay. If I could have a follow up, Kalle, how much cash do you like to have on the balance sheet in order to manage the business? And what's the plans for the excess cash? And then one more if I may, on the -- I think you -- correct me if I'm wrong. I thought I heard you say mixed signals on the industrial side.

If you said that, I'd be curious if you could provide anymore color on that. And then on the automotive business, if you could just share with us what programs might have been doing particularly well, that'd be helpful. Thank you.

If I start with the cash -- and one of the important things here is that one of the biggest or most important tasks we have is to continue to deleverage and improve our capital structure.

And I said before -- and we got the first evidence coming in, in October when we got the B-minus from Standard & Poor's, which is evidence that we are going in the right direction in our long-term plan for improved rating. So from an operational point, I don't need to sit on the cash that I'm sitting on right now. And if I would reduce cash, it is going to feel a little bit more comfortable. But some of my customers think it's more comfortable with higher cash. And I can probably round this somewhere between $500 million and $800 million on cash at hand.

Great. So, Mark, on the automotive, we talked about in the current quarter really some success in continued success in our car infotainment business. We had a ClassD High Efficiency Audio Amplifier design win at Hyundai. And we also talked about a significant strategic alliance with a customer that we don't have the authorization to reveal, but one of the leading car audio manufacturers. So that strategic alliance with that entity creates a real positive scenario for us.

So a lot of the design wins that we've had in the most recent quarter actually are associated with the car infotainment side, if you will. But remember, we won the second largest US automotive manufacturer. We'll begin to ramp kind of next year on our immobilizer door-locking system. So that -- even though we won that design back nearly a year ago or not -- yes, around a year ago, the ramp up of that will take place kind of in the spring of next year. So we continue to see very solid performance out of our automotive business, very good acceptance in China, and continuing to increase our design wins there.

When we talked about some mixed signals in industrial, I think it's probably more focused in areas like microcontrollers and interface than anything else. So we continue to be very successful and have very good product announcements. In fact, we just announced earlier this week a new Dual-Core Cortex-M4 and M0 with some DSP capabilities associated with it that we think really continues to position us in a leadership position on 32-bit arm-based microcontroller processing.

But we -- what we've seen is there's a significant chunk of the microcontroller business. The bulk of it actually goes through the distribution channel. And we've actually been able to increase our inventory and channeled more of the desired level from the extremely low levels it was in the past. And so as we've gotten to that level, we've seen somewhat of a push out -- or not a push out. That's the wrong term. We've seen some mixed signs on new orders coming in from those distribution customers based on that.

So that's one of the key indications of a recent change really in the industrial segment associated with it. And we think that that's -- clearly, the distribution sell through continues to be in a very positive scenario. So we don't think that has anything to do with market share. It's more just an indication relative to where they are and where their concern is relative to their commercials on the industrial base. So that's really kind of the best indication I can give you, Mark, relative to that mixed signals associated with it.

Thank you.

Thanks.

Your next question comes from Mr. Jeff Harlib from Barclays Capital. Please go ahead, sir.

Hi. On the capacity in CapEx, how does your backend look in terms of utilization? And what should we look at for CapEx then, given you need to release some of these capacity constraints, if there's a percentage of sales. And then I have a follow up.

So we continue to believe that we'll operate our cap ex within the 5% of revenue. That puts us at around $240 million for 2010. And we think that we would be in a position where, even at 5% of revenue in 2011, we can be in a very solid position to be able to support the ramp up in capacity to support the design wins that we have associated with it.

So I think that that really is a very balanced basis to ensure -- I mean, with the new design wins, it's absolutely critical that we have the capacity to be able to support those customers as they ramp up. So but we think we can do that within the constraints that I talked about of the 5%.

If you look at backend capacity specifically, we have some of our factories that during recent months and quarters have operated at well over 100% of equipment capacity through a number of different tricks that Manufacturing Operations can use to shorten breaks and continue to operate, so actually operate well above 100% of equipment capacity. And so but we have some selected package types, where we'll be making investments to expand that.

We have some leading edge -- our unique packages that give our customers the competitive performance advantage. And so we're making some investments in increasing the capacity associated with those unique packages, but not a broad-based expansion of our backend capacity right now, although we do have a pretty significant ramp up of capacity in a joint venture facility that we have that is currently in process of ramping that will continue to support our increased backend requirements.

But clearly, in total, we feel very comfortable in being able to support a ramp up of customer requirements within the 5% of revenue capacity -- capital investment.

Okay. And just on the cost savings, just remind us. The $740 million run rate you were at, where do you get to when you're done? Is it in the $950 million range? And do you see the -- ?

So what I had said previously is $900 million to $950 million by the end of 2011.

And that's still the case.

Still the case.

Okay. Thank you.

Thank you, sir.

Your next question comes from Mr. Frank Jarman from Goldman Sachs. Please go ahead, sir.

Great. Thanks for taking my questions. I guess the first question is just for Kalle on the capital structure. You still have a relatively sizable 2013 maturity bucket. So can you just help us think about what your plans are with regards to extending maturities down the road? Thanks.

Obviously, I will not tell what my plans are because that will cost me in the -- pay dearly in many aspects. But obviously, it is a challenge. And we are addressing that. But at the same time, you just take the numbers, the Q3 numbers. And you basically take that run rate on an EBITDA level, which is like $301 million times four. Then you deduct the CapEx that Rick mentioned, the $240 million. And then you take away $300 million to $310 million in interest. And then you know our operating model for working capital. You see that we're going to generate a substantial amount of cash going forward. And it is in the later part of 2013. And obviously, we will address our maturity profile going forward.

So clearly, the free operating cash flow that we can generate, we feel very comfortable being able to address that and not really creating any significant issues associated with it.

Thanks. And then just a follow up, I think you said on the call that, in terms of sort of cash that you plan to run with on hand going forward, you're comfortable with $500 million to $800 million. So that would leave sort of $260 million of cash as deemed excess cash.

Well, to be very clear what I said, I don't need all the cash I have. But I also need to make sure that my balance sheet is strong and I have the right rating not to worry customers because many of my customers are not as sophisticated. They look at my cash position. And I want to make sure when I start to reduce the cash on hand over time that I don't get into an adverse situation with my customers. And that is nothing I do overnight. It's going to be a longer process.

Got you. So I should still assume that your plans are to still run with some excess cash on hand at this stage in the gain.

Yes.

Okay. Great. Thanks very much. That's all I had.

Thank you.

Your next question comes from Mr. Jake Kemeny from Morgan Stanley. Please go ahead, sir.

Hi, good morning. I just wanted to follow up on Frank's question with respect to the capital structure. I mean, clearly, it looks like you guys can generate a lot of free cash flow. But why not proactively address the 2013 securities today, given the strength of the high-yield bond market and a lot of your peers are accessing the capital markets to push out 2013 maturities for up to ten years right now? You guys been in the semiconductor market a long time. You know how volatile it can be. Why not take advantage of the current market today?

So I think it's really important that you guys have a good baseline of our model. We've put in place a business model that allows us to feel very comfortable with our ability to generate free cash, even through the cycles of the semiconductor business. So -- and with the inherent cash flow capability, we have no requirement to do anything about the 2013 maturities.

That doesn't mean to say that we might not be opportunistic and try to take advantage of the market opportunities. So at the appropriate time, if we were to decide to do something, we'll announce that and come forward, associate with that. But we clearly will try to do the best things we can to address our capital structure and put us in a good position.

But with the business model we have and the mix of businesses we have today, we feel very comfortable in being able to continue to generate good solid operating free cash flow, even through the cycles of the semiconductor business.

Okay. And then just one other one on the sales to the wireless JV that are currently reported in your manufacturing segment, what have those been on a quarterly basis? And I think you mentioned in 2011 those are going to start to wind down. Can you go over that one more time?

Are you asking specifically on -- in general? Or are you asking specifically about what we sell to ST Ericsson?

Specifically what you sell to ST Ericsson and the wind down of that revenue stream.

So if you take that right now, as I've said in my presentation before, half of that is basically finished goods to Trident. Then you should take out some millions for what is going to DSPG. Then part of it is also what is coming out of SSMC that -- when they sell to others. But basically, it has been running at a level between $20 million and $24 million per quarter.

And that'll -- as they end-of-life those products out through 2011 and maybe even some of those rolling out beyond that slightly, that'll continue to ramp down as they introduce new products that basically displace those in the marketplace that they'll source from other manufacturing facilities.

All right. Thank you.

Thank you.

Thank you.

(Operator Instructions)

Your next question comes from Mr. [Jordan Toronto] from [Brigade Capital]. Please go ahead, sir.

Hey, guys, I was just wondering, looking at the business model, obviously, the margins are significantly different between the High Performance Mixed Signal and the Standard Products. Is the Standard Products a business that you feel committed to long term? Or do you feel like if you were able to get a great price and do some kind of deleveraging sell that business and have it be deleveraging to NXP? Is that something you would consider? Or you view it as core?

I've got to tell you that it's important that we try to explain the significance of that business. So other than just the cash flow and the return on capital that Standard Products gives us that allows us to invest more in High Performance Mixed Signal to be sure that we can have those customer relationships, the other thing that Standard Products, specifically transistors and diodes and integrated discretes in Standard Products, not as much on sound solutions allows us, is it allows us a stronger breadth with customers because, when you look at the combination of our Standard Products and our High Performance Mixed Signal products, we're the second largest semiconductor company in sales through the distribution channel.

By having that basis, it allows us to have a different customer perspective, a different influence on our distribution partners associated with it than we would do on a standalone basis.

The other thing that's significant is, with the combination of our transistors and diodes as well as our integrated discretes with our High Performance Mixed Signal business, we will build this year 65 billion units. That gives us the scale to ensure that we have absolutely the lowest cost packaging associated with not only our Standard Products but also our High Performance Mixed Signal business. So it gives us the leverage to be sure that we can have the package innovation and the scale to ensure that we have a cost advantage from the backend side on Manufacturing Operations.

Some of our competitors talk about trying to expand their capacity, talking about 300 millimeter. When you look at most of our products, there's a significant portion of it that comes in the backend as well. So by having a cost advantage associated with the backend operations that comes from the scale that we have with our Standard Products clearly gives us an advantage when looking at it from a total cost perspective.

So there's some definite strategic advantages associated with it. It's a good solid business for us. We continue to be number two in transistors and diodes and, if we chose to increase our CapEx investment, could probably be the leader in that market. It provides us with a strong customer relationship associated with the customer. So there are clearly benefits associated with it.

And we feel very comfortable with our capital structure and being able to address our capital structure as it is now. Back a year and a half ago or so, when we were much more highly leveraged, then if we could've gotten fair value for that business and allowed us to really look at it, then it might've been up for consideration. Today, I think that we're in a good solid situation, where it generates a lot of cash for us. It provides a lot of advantages for our High Performance Mixed Signal business.

But we have to be also reasonable that, with our capital structure, it's important for us to create a solid business and a solid foundation. So if somebody wanted to pay us absolute fair value associated with it, then we'd have to consider it. But we'd also have to understand the ramifications it had on the customer side as well as the volume side to be able to drive the manufacturing cost from the packaging viewpoint.

Thank you.

Thanks.

The last question comes from Guy Baron from Deutsche Bank. Please state your question, sir.

Hi. Thank you for squeezing me in. Just a couple of quick ones, I'm going to try the balance sheet one again. The -- what's sort of your view of the optimal level of leverage on this business? Is it necessarily trying to get it down to zero? And at what point do you consider diverting some of that free cash away from pay down? And where does that cash go?

So if you look on the net debt, we are right now just below the 3.7, which means also that we've got 50% of the forward start coming in right now, replacing and extending the revolving credit facility that expires in 2012 to 2015. So that's one thing to have in mind. And what we have said is that over a longer period, we would like to become investment grade. And that's the view we have on a longer-term target capital structure. But that's going to be over not the next two years. It's going to take several years to get there, even with the strong cash generation as we have today.

We'll continue to make good solid progress on looking at our leverage factor. As Kalle talked about, the fact is we've been able to reduce that significantly. I think that if we get down into the three-ish range, we feel pretty comfortable operating in the near term, even though long term we think that being at investment grade just gives us distinct advantages with the inherent cash flow generation capability of the business.

We also will probably try to take advantage, just like we did in the most recent quarter, where there's some key technology that creates more value in a combination with our other products than it does on a standalone basis, being able to be opportunistic in tuck-in acquisitions or technology that really enables us to drive more in the future. So a few very small amount of cash that we used in the Jennic acquisition positions us extremely well with significant revenue growth out a couple years from now associated with that basic fundamental technology that comes from that.

And there's other areas that we might need from a technology viewpoint that clearly will be significant for us and have an excellent return on capital basis. So we'll be able to take advantage of those tuck-in acquisitions and technology that's really capable of driving our top line growth at a much more accelerated basis than we could do on a standalone basis without that. But we clearly have the flexibility we believe within the capital structure that we have to be able to accomplish those as we go forward.

Okay. Understood. And then just a quick follow up on the ratings objective, your ratings at this point appear to be sort of lagging where the trajectory of the business is headed. Could you maybe talk a little bit about kind of what the milestones are or maybe the plan timing for when you think you can have those discussions with the agencies and try to push for that upgrade?

So we got the upgrade in October for a B-minus with Standard & Poor's. We are in constant contact with Moody's. And I believe that we will get an upgrade. But timing wise, I think it's very hard for me to predict how they will react. I know that you lose your rating pretty fast. And it takes some time to earn it back.

Thank you very much.

We'd like to see it soon.

Yes.

Thank you, sir. Mr. Clemmer and Mr. Sundstroem, there are no further questions. Please continue with any points you wish to raise.

Thank you very much. Let me just quickly try to summarize. We're really pleased with the report on both of our product segments and the Q3 results. They both performed very well in the quarter, as we saw again, our sixth consecutive quarter of growth with significant operational improvements in Q3. And clearly, in our High Performance Mixed Signal business with the first three quarters of the year being able to grow at a 57% basis from 2009 first three quarters indicates the market share gains and the success that we're having with design wins and being able to drive that. So thanks a lot for your interest. And we'll look forward to talking to you in the future.